Subject-To Deal Structure: Complete Guide to Subject-To [Real Estate Investing](/blog/brrrr-strategy-guide)

"Subject-to" deals—purchasing property while leaving the existing mortgage in place—represent one of the most powerful creative financing strategies in real estate. This technique allows investors to acquire properties with little to no money down, bypass traditional lending, and help distressed homeowners while building wealth. But subject-to deals also carry significant risks and legal complexities.

This comprehensive guide explains exactly how subject-to transactions work, how to structure them safely, legal considerations, contract clauses, and common pitfalls to avoid.

What Is a Subject-To Deal?

A "subject-to" purchase means you buy a property subject to the existing financing—meaning the seller's mortgage remains in place, and you take over making the payments.

The Traditional vs. Subject-To Purchase

Traditional Purchase:

1. Buyer gets new mortgage in their name
2. Seller pays off their mortgage at closing
3. Clean transfer of property and debt
4. No ongoing connection between buyer and seller

Subject-To Purchase:

1. Buyer takes title to property
2. Seller's mortgage remains in their name
3. Buyer makes payments on seller's loan
4. Seller's credit tied to buyer's payment performance
5. Deed transfers but loan doesn't

Key distinction: The loan obligation remains with the seller, but the buyer owns the property and makes the payments.

Why Subject-To Deals Work

Benefits for Investors (Buyers)

Little to No Money Down:

• No bank qualification needed
• No appraisal or underwriting
• No origination fees or closing costs (minimal)
• Can acquire properties with just closing costs ($1,500-$3,000)

Immediate Equity:

• Often buy below market value
• Seller motivated and discounts price
• Instant equity position

Favorable Loan Terms:

• Inherit existing (often low) interest rate
• Fixed-rate financing common
• Better terms than current market rates
• No prepayment penalties (usually)

Speed:

• Close in 7-14 days
• No bank delays
• No red tape
• Simple documentation

Rental Income:

• Immediate cash flow if property rented
• PITI often lower than market rent
• Positive cash flow from day one

Benefits for Sellers

Avoid Foreclosure:

• Stop foreclosure proceedings
• Protect credit from foreclosure damage
• Eliminate stress and uncertainty

Debt Relief:

• No longer responsible for payments
• Monthly obligation removed
• Can move on with life

Avoid Deficiency:

• Short sale or foreclosure may leave debt
• Subject-to transfers obligation without deficiency

Credit Protection:

• If you make payments on time, their credit continues improving
• Better than foreclosure or late payments

Quick Sale:

• No waiting for bank approvals
• No buyer financing contingencies
• Fast closing

No Realtor Commissions:

• Save 5-6% on sale price
• More net proceeds or equity buyout

How Subject-To Deals Are Structured

The Typical Transaction Flow

Step 1: Find Motivated Seller

Ideal candidates:

• Facing foreclosure
• Behind on payments
• Transferred jobs/relocating
• Inherited unwanted property
• Divorce situations
• Medical hardship
• Little or no equity
• Can't sell traditionally

Step 2: Analyze the Deal

Calculate:

• Outstanding loan balance
• Monthly PITI payment
• Property value (ARV)
• Needed repairs
• Rental income potential
• Your potential profit

Deal criteria:

• Payment ≤ 75% of market rent (cash flow)
• Property needs minimal repairs (or factor in cost)
• Seller willing to walk away from equity (if any)
• Clean title (no major liens beyond mortgage)

Step 3: Structure the Agreement

Key documents:

• Purchase and Sale Agreement
• Authorization to Release Information (loan)
• Authorization to Pay (allow you to make payments)
• Deed (warranty or quitclaim)
• Limited Power of Attorney (optional)
• Property Management Agreement (if renting to seller)
• Lease-Option Agreement (alternative structure)

Purchase price: Often equals or is slightly above loan balance

Equity:

• Little/no equity: Seller walks away, you take over
• Some equity: Negotiate payment plan or note

Step 4: Execute Documents

At closing (can be done with or without title company):

• Seller signs deed transferring ownership to you
• You assume responsibility for payments
• Authorization forms signed
• Title company issues title insurance (if used)
• Deed recorded in county records

Seller's loan remains in seller's name

Step 5: Service the Loan

Critical ongoing responsibilities:

• Make payments on time every month
• Maintain property insurance
• Pay property taxes
• Keep seller informed (best practice)
• Monitor loan status

Essential Contract Components

1. Purchase and Sale Agreement

Standard elements plus subject-to clauses:

Purchase Price: "Buyer agrees to purchase property for $__________, payable as follows: (a) Cash at closing: $________ (b) Subject to existing mortgage(s) with approximate balance of $________ as of [date]"

Subject-To Language: "Buyer shall take title to the property subject to existing loan(s) with [Lender Name]. Buyer assumes responsibility for making all payments but does not assume personal liability for the debt. Loan remains in Seller's name."

Seller Acknowledgments:

• Seller understands loan remains in their name
• Seller authorizes buyer to make payments
• Seller will not contact lender to interfere
• Seller releases buyer from liability if buyer makes timely payments

Due-On-Sale Clause: "Seller and Buyer acknowledge that the existing loan(s) may contain a due-on-sale clause allowing lender to accelerate the loan upon transfer of title. Seller and Buyer agree to this risk and agree that Buyer will make all payments to minimize this risk."

2. Authorization to Release Information

Required to communicate with lender:

AUTHORIZATION TO RELEASE INFORMATION

To: [Lender Name]
Re: Loan No. ______________, Property: [Address]

I, [Seller Name], authorize [Lender Name] to release any and all information regarding the above-referenced loan to [Buyer Name], including but not limited to:

- Loan balance and payment history
- Escrow account status
- Insurance and tax payment information
- Loan terms and conditions
- Payoff information

This authorization shall remain in effect until revoked in writing.

________________________     __________
Seller Signature              Date

3. Authorization to Pay

Authorizes you to make payments on their behalf:

AUTHORIZATION TO PAY

I, [Seller Name], borrower on loan number _____________ with [Lender Name] for property at [Address], hereby authorize [Buyer Name] to make mortgage payments on my behalf directly to the lender or through a third-party servicing company.

I understand that [Buyer Name] has purchased the property and is making these payments as the new owner, but that the loan remains in my name and I remain legally obligated to the lender.

I authorize the lender to accept payments from [Buyer Name] and to provide confirmation of such payments.

________________________     __________
Seller Signature              Date

4. Warranty Deed or Quitclaim Deed

Transfers ownership:

Seller deeds property to you using warranty deed (preferred) or quitclaim deed.

Recorded in public records to establish your ownership.

Note: Deed transfer may trigger due-on-sale clause (see risks below).

5. Lease-Option or Land Contract Alternative

To avoid immediate deed transfer:

Some structures use:

Lease-Option:

• Seller leases to you with option to buy
• You make "lease payments" equal to mortgage payment
• Exercise option and get deed later (after refi or payoff)
• Delays due-on-sale trigger

Land Contract (Contract for Deed):

• Equitable title to you, legal title stays with seller
• Deed transfers when fully paid
• May delay due-on-sale clause

These structures have pros/cons and state-specific rules.

Advanced Protection Strategies

1. Title Insurance

Get owner's title insurance:

• Protects against title defects
• Coverage even though loan not in your name
• Title company understands subject-to deals
• Some title companies won't insure subject-to (find ones that will)

Cost: $1,000-$2,500 typically

2. Escrow Service or Loan Monitoring

Use third-party to ensure payments made:

Services like:

• National Note Servicing
• Sub2 Servicing
• FCI Lender Services

How it works:

• You pay servicing company monthly
• They forward payment to lender
• They track payment history
• They provide statements to you and seller
• Creates accountability and documentation

Cost: $25-$50/month

Benefits:

• Proves you're making payments
• Seller can verify
• Paper trail if disputes arise

3. Insurance Considerations

Property Insurance:

Critical issue: Property is in your name but loan in seller's name.

Solution:

• Get insurance in your name (new policy)
• Add lender as mortgagee
• List seller as additional insured
• Notify lender of new policy
• Maintain coverage continuously

What not to do: Let seller's policy lapse—lender will force-place expensive insurance.

4. Property Tax Strategy

Options:

Option A: You pay directly

• Set up account with county
• Make payments yourself
• Ensure timely payment
• Get receipts

Option B: Lender escrow

• If loan has escrow, taxes paid through mortgage payment
• Ensure escrow account adequately funded

Critical: Never let taxes become delinquent—can trigger foreclosure.

5. Seller Ongoing Communication

Best practices:

• Monthly or quarterly updates to seller
• Send proof of payment made
• Notify of any issues immediately
• Maintain positive relationship
• Address concerns promptly

Why it matters:

• Prevents seller from contacting lender
• Reduces risk of seller interference
• Builds trust
• Protects you legally

The Due-On-Sale Clause: Critical Risk Factor

What Is the Due-On-Sale Clause?

Standard clause in most mortgages since 1982:

"If all or any part of the Property or any interest in the Property is sold or transferred without Lender's prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument."

In plain English: If you transfer the property, the lender can demand full payoff.

Do Lenders Actually Enforce It?

Reality: Rarely, but they can

Lenders typically don't enforce if:

• Payments are made on time
• Property is maintained
• Insurance is current
• No red flags

Why lenders often ignore it:

• Performing loan is profitable
• Foreclosure is expensive
• Servicing transfers make tracking difficult
• Administrative burden to enforce

When lenders DO enforce:

• Payments are late or missed
• Property abandoned or deteriorating
• Insurance lapses
• Major changes in market (e.g., rates rise significantly)

Statistics: Less than 1% of subject-to deals result in due-on-sale enforcement, but risk exists.

Strategies to Minimize Due-On-Sale Risk

1. Never Miss a Payment

• Make payments on time, every time
• Set up autopay or reminders
• Build reserves for vacancies

2. Keep Low Profile

• Don't contact lender unless necessary
• Don't send deed to lender
• Use seller's authorization to communicate

3. Maintain Property and Insurance

• Keep property insured
• Maintain in good condition
• Pay taxes on time

4. Use Loan Servicing Company

• Professional payment servicing
• Payments come from servicing company, not you
• Less obvious that ownership changed

5. Plan Exit Strategy

• Refinance in your name within 1-3 years
• Sell property before lender notices
• Pay off loan from sale or cash-out refi

6. Consider Lease-Option First

• Delays deed transfer
• Establish track record
• Transfer deed after 12-24 months
• Lower risk early on

Garn-St. Germain Act Exceptions

Federal law exempts certain transfers from due-on-sale:

• Transfer to spouse or children
• Transfer to living trust (for estate planning)
• Transfer due to borrower's death
• Transfer to ex-spouse (divorce)

Investor transfers NOT exempted—subject-to deals can trigger the clause.

Legal and Ethical Considerations

Full Disclosure to Seller

You MUST explain:

1. Loan stays in seller's name

   • Their credit is tied to your payment performance
   • Loan will appear on their credit report
   • They remain legally liable to lender

2. Due-on-sale clause risk

   • Lender could call loan due
   • Small risk but possible
   • What happens if lender accelerates

3. Credit implications

   • If you miss payments, damages their credit
   • [Debt-to-income ratio](/blog/dti-ratio-explained) affected if they need future loans
   • Foreclosure would be in their name

4. You're not assuming the loan

   • You're agreeing to make payments but not legally obligated to lender
   • Seller remains obligated

Have seller acknowledge understanding in writing.

Seller's Attorney Review

Best practice:

• Encourage seller to consult attorney
• Provide time for legal review
• Transparent about all terms
• Never pressure or rush

Protects you from future claims of fraud or misrepresentation.

State-Specific Regulations

Some states regulate subject-to transactions:

• Texas: Requires specific disclosures
• Illinois: Additional consumer protections
• Others: May classify as "installment land contracts" with regulations

Consult local [real estate attorney](/blog/how-to-build-real-estate-team) before structuring deals.

Avoid Equity Stripping

Illegal/unethical:

• Taking property from seller with equity and selling immediately for profit without compensation
• Pressuring distressed homeowner into bad deal
• Misrepresenting your intentions

Ethical approach:

• Fair dealing
• Full disclosure
• Compensate seller for equity if exists
• Provide real solutions to their problems

Common Subject-To Deal Structures

Structure 1: Zero Equity, Zero Down

Scenario:

• Property worth $200,000
• Loan balance: $200,000
• Seller has no equity, facing foreclosure

Deal:

• You take title subject to $200,000 loan
• Seller receives $0 at closing
• You pay only closing costs ($1,500-$3,000)

Seller benefit: Avoids foreclosure, credit damage

Your benefit: Control $200,000 asset for $3,000

Structure 2: Some Equity, Deferred Payment

Scenario:

• Property worth $250,000
• Loan balance: $200,000
• Seller has $50,000 equity but can't sell traditionally

Deal:

• You take title subject to $200,000 loan
• You pay seller $25,000 for their equity:
  • $5,000 at closing
  • $20,000 via promissory note (interest-only, 3-year balloon)

Seller benefit: Gets some cash, avoids foreclosure, gets $20,000 later

Your benefit: Acquire property with $5,000 down + closing costs

Structure 3: Lease-Option Before Subject-To

Scenario:

• Seller nervous about immediate deed transfer
• You want to test the property/payments

Deal:

• Month 1-12: Lease-option (you rent, option to buy)
• Rent = mortgage payment
• Month 13: Exercise option, take deed subject to loan

Benefits:

• Time to verify numbers
• Build trust with seller
• Delay due-on-sale trigger
• Both parties get comfortable

Structure 4: Seller Rent-Back

Scenario:

• Seller wants to stay in home but can't afford payments
• You want rental property

Deal:

• Take title subject to existing loan
• Lease property back to seller at affordable rent
• Rent + your contribution = mortgage payment

Example:

• Mortgage payment: $2,000/month
• Seller pays you $1,200/month rent
• You cover $800/month difference
• Seller stays in home, you gain equity/appreciation

Real-World Subject-To Example

Property: Single-family home, Dallas suburbs

Seller Situation:

• Laid off, 3 months behind on payments ($6,000 in arrears)
• Foreclosure notice received
• No equity (underwater)
• Needs to relocate for new job

Property Details:

• Value: $185,000
• Loan balance: $190,000 (purchased at peak)
• Payment: $1,450/month (PITI)
• Rental comps: $1,850/month

Investor's Offer:

• Buy property subject to existing loan
• Pay seller $0 (no equity)
• Bring loan current by paying $6,000 arrears
• Pay $2,000 closing costs

Total investment: $8,000

Seller benefits:

• Foreclosure stopped
• Credit protected from foreclosure
• Can move for job
• Monthly stress eliminated

Investor benefits:

• Controls $185,000 property for $8,000
• Positive cash flow: $1,850 rent - $1,450 PITI = $400/month
• 60% cash-on-cash return ($4,800 annual / $8,000 invested)
• Equity appreciation over time

Exit strategy:

• Refinance in own name within 2 years (rates permitting)
• Or sell and cash out
• Or hold long-term as rental

Result: Win-win. Seller avoided foreclosure, investor acquired cash-flowing property with minimal capital.

Exit Strategies for Subject-To Properties

1. Refinance in Your Name

When:

• After 12-24 months seasoning
• Your credit and income qualify
• Rates are favorable

Process:

• Apply for new mortgage in your name
• New loan pays off existing (seller's) loan
• Seller released from obligation
• You have [conventional mortgage](/blog/conventional-loan-requirements)

Best outcome: Seller's credit freed, you have standard financing.

2. Sell the Property

When:

• Market appreciates
• You want to cash out
• Better opportunity elsewhere

Process:

• List property for sale
• Buyer gets new mortgage
• Payoff seller's existing loan at closing
• Profit = Sale price - Loan balance - Selling costs

3. Lease-Option to Tenant-Buyer

When:

• Want to exit but market is soft
• Tenant wants to buy eventually

Process:

• Find tenant-buyer
• Lease with option to purchase
• They pay option consideration ($3,000-$10,000)
• Rent credit toward purchase
• They exercise option in 1-3 years

You profit: Option fee + rent credits + sale profit

4. Hold Long-Term

When:

• Cash flow is strong
• Appreciation likely
• Want passive income

Strategy:

• Keep as rental indefinitely
• Make payments on seller's loan
• Eventually pay off loan (builds equity)
• Refinance or sell when advantageous

Risk management: Monitor due-on-sale risk, stay current, keep seller happy.

Common Mistakes and Pitfalls

1. Inadequate Due Diligence

Mistakes:

• Not pulling title report (hidden liens)
• Not verifying loan balance
• Not checking payment history
• Assuming seller's information is accurate

Solution: Always verify:

• Pull title commitment
• Get mortgage statement
• Authorization to release information
• Check for tax liens, HOA dues, judgments

2. Missing Payments

Fatal error: Missing even one payment

Consequences:

• Damages seller's credit (lawsuit risk)
• Triggers lender attention (due-on-sale risk)
• Ruins relationship with seller
• Potential foreclosure

Solution:

• Autopay from separate account
• 6-month PITI reserves minimum
• Loan servicing company
• Calendar reminders

3. No Insurance or Insurance Lapse

Problem: Property uninsured or seller's policy canceled

Consequences:

• Lender force-places insurance (expensive)
• Lender calls loan due
• You're unprotected
• Violates mortgage terms

Solution:

• Get insurance in your name immediately
• Add lender as loss payee
• Never let coverage lapse
• Provide proof to lender

4. Poor Seller Communication

Problem: Seller feels ignored, gets nervous, contacts lender

Risk: Seller tells lender property was sold, triggers investigation

Solution:

• Regular updates to seller
• Payment confirmations
• Annual statements
• Return calls promptly
• Maintain positive relationship

5. Ignoring Due-On-Sale Clause

Problem: Assuming lender will never notice

Reality: Small risk but devastating if enforced

Solution:

• Acknowledge the risk
• Plan exit strategy
• Make payments perfectly
• Have backup plan if called

6. Bad Deal Fundamentals

Mistake: Subject-to doesn't fix a bad deal

Example:

• Property worth $150,000
• Loan balance $180,000
• Payment $1,600
• Rent $1,400
• Negative cash flow

Even with no money down, this is a bad deal.

Solution: Same investment criteria as any deal—cash flow, equity, exit strategy.

Related Articles

• [1031 Exchange Boot Explained: What Triggers Taxes and How to Avoid It](/blog/1031-exchange-boot-explained)
• 1031 Exchange For Beginners
• Best Cities For Cash Flow 2026
• [Best Cities For Rental Income 2026](/blog/best-cities-for-rental-income-2026)
• [How to Identify the Best Neighborhoods for Rental Property Investment (Data-Driven Approach)](/blog/best-neighborhoods-for-rental-investment)

FAQ: Subject-To Real Estate Deals

Is buying subject-to legal?

Yes, in all 50 states. However, transferring title may trigger the due-on-sale clause in the mortgage, allowing the lender to call the loan due. This is a contractual issue (between seller and lender), not an illegal act. Some states have additional disclosure requirements—consult a local attorney.

What happens if the lender calls the loan due?

If the lender enforces the due-on-sale clause, they demand full payoff. Options: (1) refinance immediately in your name, (2) sell the property and pay off loan, (3) negotiate with lender (rare), (4) bring in a partner to buy out. Having reserves and exit strategy is critical.

How do I find subject-to deals?

Target motivated sellers facing foreclosure, job relocation, divorce, inherited property, or financial hardship. Marketing: direct mail to [pre-foreclosure](/blog/buying-foreclosure-guide) lists, bandit signs, online ads, networking with attorneys/probate, referrals from other investors. The key is finding sellers who need quick solutions.

Can I get a mortgage on a subject-to property later?

Yes, typically after 12-24 months of "seasoning" (ownership). You'll need qualifying income, credit, and the property must appraise. This is often the planned exit strategy—refinance in your name and release the seller from their obligation. Some lenders require longer seasoning for subject-to acquisitions.

What if the seller files bankruptcy after I buy?

If seller files bankruptcy, the mortgage debt may be discharged, but the lien remains on the property. You still need to make payments to avoid foreclosure. The seller's bankruptcy shouldn't affect your ownership, but consult an attorney if this happens. Having a recorded deed protects your interest.

Do I need title insurance for a subject-to deal?

Highly recommended. Title insurance protects against defects, liens, and claims. Some title companies won't insure subject-to deals; find one experienced in creative financing. The one-time premium ($1,000-$2,500) is worth the protection. Self-insuring by skipping title insurance is risky.

How do I convince a seller to do a subject-to deal?

Focus on solving their problem, not your profit. Present subject-to as a solution to foreclosure, credit damage, or inability to sell. Explain clearly how it works, risks, and benefits. Provide references, testimonials, and proof you're legitimate. Ethical, transparent communication builds trust. Attorney review for seller shows you're acting in good faith.

Conclusion: Powerful Tool with Responsibility

Subject-to investing offers extraordinary opportunities—acquiring properties with minimal capital, helping distressed homeowners, and building wealth through creative financing. But with this power comes responsibility.

Keys to success:

• Thorough due diligence and deal analysis
• Full disclosure and ethical treatment of sellers
• Proper documentation and legal structure
• Flawless payment performance
• Risk management (insurance, reserves, exit strategy)
• Ongoing seller communication
• State-specific legal compliance

When executed properly, subject-to deals create win-win scenarios: sellers avoid foreclosure and credit damage while investors build portfolios without traditional financing constraints.

The due-on-sale clause is a real risk—but manageable with proper strategies, payment discipline, and exit planning. Thousands of investors successfully use subject-to financing to build multi-million dollar portfolios.

Master this strategy, treat sellers ethically, manage risk responsibly, and subject-to can become a cornerstone of your real estate investing business.

Ready to scale your real estate investing beyond creative financing? When you're ready for traditional rental property financing, HonestCasa offers DSCR loans with no personal income verification. Check your rate today and build your rental empire.